As an ex-serviceman or someone who is going to retire from the forces soon, the factors that affect your wealth planning are not the same as other regular corporate professionals. It’s very different for you, as have been most things in life till now. While the core principles of wealth management remain the same, their application needs to factor in your special circumstances.
There is a balance of some good things and some things that could be better. You have an inflation-indexed pension for one and access to good health facilities, that typically constitute a substantial portion of wealth planning for a person from civvy-street.
Whereas their apparent wealth at the same stage in life seems higher, given the difference in salaries over the years. But as you look ahead, both of you are probably seeking the same thing - peace of mind when it comes to your finances.
This also means how you plan your finances needs to be both more nuanced and smarter. When thinking about money at this stage, consider these five major needs for which you will utilise money:
- For regular living expenses
- For one-off annual expenses (e.g. Vacations / Upgrade to car etc)
- For large one-off expenses (e.g. Children’s education / Marriage)
- For a more comfortable and expanded lifestyle (Larger homes, cars etc)
- For leaving behind a legacy for your near and dear ones
Correspondingly you have a few sources of income and you need to plan prudently and appropriately to meet the above requirements.
- Your inflation-indexed pension
- Your new salary
- Returns from your existing investments: accumulated during your Fauji career and probably commutation of your DSOP etc.
- Returns and growth from your new investments: this is probably as important as the above 3 and this is where we believe Scripbox can add most value
Keep in mind what’s going in your favour and why this matters
As we mentioned earlier, you have a pension and this is usually inflation-linked in the form of dearness allowance. You have full medical cover thanks to ECHS or your nearby MH/Command Hospital. You also have some benefits other retirees generally have no access to, such as Canteen facilities and access to Army clubs etc.
What this means is, that you can take a much longer-term view when it comes to your money and investments. The fact is that even post-retirement, returns from an equity are critical if you want to maintain a similar level of lifestyle you were maintaining while serving in the armed forces. The key reason for investing a significant part of your savings corpus in Equity is inflation. Let’s elaborate.
Inflation - what you need to beat
Look at the chart below. Assume a serviceman on retirement got Rs. 1 Cr including DSOP, PPF, AGIF etc. If inflation is 5%, this is what happens to the purchasing power value of Rs. 1 Cr.
As you can see, inflation is reducing your purchasing power at a certain rate which normally changes year to year. It also varies dramatically for certain things. Your daily groceries might not become dramatically more expensive 5 years from now, but your medical expenses might! What if you consider putting your money in an FD?
Currently, FDs are giving about 5%-6%. This may just match inflation but if you consider that you have to pay tax on the returns, then you fall well below inflation in terms of real growth of your money. The above chart will still show a downwards trend, but it just won’t be as steep.
But how do you ensure you stay ahead of inflation and maintain your buying power and not have to skimp on things which define you and your life?
Simply by investing in something that stays ahead of inflation. Equity, or the stocks and shares of companies, has a history of doing that over the long term. Historically, equity returns have remained between 14%-16% when inflation was trending at around 8%.
If we consider 7 years or more as an investment period, equity has almost always stayed ahead of inflation by many points. Currently, we broadly expect equity to grow around 11.25% going forward, and with inflation fluctuating between 5%-6%, you are more likely than not to stay ahead.
So what does a smart retirement look like for you?
Let’s assume you retire between 50 and 58. You will most likely work for another 10 years in the private or public sector because you still have the energy and interest. Plus, sitting at home can get boring real fast sometimes. This move will also supplement your income.
As this is happening you need to get most of your savings to do the work for you, and smartly.
Considering what we mentioned above in terms of what is working in your favour, you should ideally consider investing 50% of the combined surplus (after your immediate and short term needs have been catered to) in Equity, and ideally through equity mutual funds.
This will ensure you stay comfortably ahead of inflation through the decades of your retirement. The surplus from this will also add to the legacy you want to leave behind for your children and grandchildren.
Your short term needs are likely to involve big expenses which are generally one-time commitments such as your child’s marriage or higher education. Keep this in Fixed Income assets such as liquid funds or short term debt funds.
This article first appeared in Forcenet magazine.